STOCKS

Even the safest income stocks can lose ground in a down market. That's OK, as long as they won't stay down. Those are the ones MoneyShow's Jim Jubak wants for his dividend income portfolio.

"What do you mean, get paid while you wait? A stock with a 4% dividend that falls 25% in price is still a losing proposition."

That's from an e-mail I got recently in response to a post in which I added Ensco (ESV) to my watch list.

That is, of course, absolutely right. A 4% dividend gets wiped out pretty quickly when a stock tumbles in price. Ideally, you'd like to buy dividend stocks that never go down in price and that don't share in market volatility—except to the upside.

Unfortunately, in my experience, "ideally" doesn't exist. In a down market, dividend stocks tend to go down less than the typical stockmdash;because they have that dividend yield to support their pricemdash;but they do go down.

Dividend stocks can also turn in bad quarters, and when they do, they go down in price. Even stocks with long, uninterrupted histories of never cutting dividends, and even of raising them every quarter, can fall in price.

If you're going to wait until you've found a dividend stock that never goes down, you're never going to buy one. Instead, look for the ones that won't go down permanently. Today, I'm going to review my ten-stock Dividend Income portfolio, add a couple of new picks and offer advice on how to avoid losers.

Permanent Impairment of Capital
If you were going to wait for that ideal income investment that never goes down, you'd never buy a bond, either. Bond prices fluctuate with interest rates, inflation, fear, and the credit ratings of the issuer.

What we hope for from a bond is that, despite the fluctuations in price, it will:

  • pay the interest promised to buyers and on time
  • when the bond matures, it will pay off 100% of its promised maturity value

Now, dividend stocks are riskier than bonds. They don't have a maturity date, so they don't carry a promise that you'll get back what you paid on that nonexistent date. By buying a dividend stock, you're signing up for more volatility than you'd get with a bond.

Hopefully, you'll also get a higher return than you'd get from a less-risky bond. But you certainly aren't looking for an investment without any volatility.

Indeed, what you're looking for is a stock that pays its promised dividend on time and raises its dividend over timemdash;and where the stock price doesn't show a permanent impairment of capital.

What's "permanent impairment of capital"? It's what you want to avoid in a dividend stock (and indeed, in any income-investment vehicle). You don't mind if a stock gyrates in value while you hold it, as long as it doesn't go down and stay there. When you need to sell it, you want it to be worth as much or more than you paid for it, so that the yield you earned by owning it isn't wiped out by the drop in capital.

It's Easier When They Go Up
Of the ten stocks in my Dividend Income portfolio, six wouldn't cause a dividend income investor any second thoughts: In the time since I last reviewed this portfolio on May 6, 2011 (or from when I bought them, if I purchased the shares during one of my periodic updates), all six have climbed in price.

Some of the gains were pleasingly hefty. Magellan Midstream Partners (MMP) was up 25.8% from May 6, 2011 through June 29, 2012. Oneok Partners (OKS) was up 31.8%. AmBev (ABV) was up 21.5%.

Some were more modest, although in this market I'll take modest. General Electric (GE) was up 11.5% from my February 3 purchase through June 29. CPFL Energia (CPL) was up 5.1% from my September 20, 2011 purchase through June 29. Penn Virginia Resource Partners (PVR) eked out a 0.9% gain from May 6, 2011 through June 29, 2012.

NEXT: 2 Stocks to Buy, 2 Stocks to Ditch

Tickers Mentioned: Tickers: ESV, MMP, OKS, ABV, GE